ERS on pace to post 8% return

The state pension fund shows a gain in its fiscal second quarter, but falls behind its benchmark

The state's largest pension fund, posting a gain for the 10th time in the last 11 quarters, reached the midway point of its fiscal year more than halfway toward its annual 8 percent target rate of return.

Strong performances in international equities and domestic midcap stocks helped the state Employees' Retirement System fund gain 1.8 percent in the fiscal second quarter to bring its six-month return to 5.9 percent. The fund has beaten its 8 percent target in each of the last two fiscal years with a gains of 10.2 percent in fiscal 2005 and 15.5 percent in fiscal 2004.

Total assets, which take into account contributions and distributions, increased $130 million in the quarter to $9.62 billion from $9.49 billion in the three-month period ending Sept. 30.

For the 2005 calendar year, the fund grew 7.7 percent and its assets increased $400 million from the end of 2004.

Kimo Blaisdell, chief investment officer for the ERS, said he was pleased with the fund's six-month performance but "it doesn't mean we can just double it" to calculate a full-year return.

"We're optimistic," he said. "The beginning of 2006 has started out very strong and we're looking forward to keep it going and produce a very good fiscal year return."

Although the state pension fund had a gain for the quarter, it trailed the 2.2 percent return of its benchmark, ranking the fund in the 94th percentile (first is best) for the period. Fund adviser Callan Associates, the San Francisco-based company that makes recommendations to the ERS board, said most of the shortfall from the pension fund's benchmark was attributed to underperformance from the ERS real estate managers' 1.3 percent return in the fiscal first quarter. The real estate numbers are reported on a one-quarter lag basis due to the time it takes to calculate the information.

Blaisdell said he wasn't worried about the real estate performance because it makes up only 8 percent of the pension fund portfolio and over the last year is up more than 22 percent. He said the results are always uneven because appraisals on ERS properties are conducted just once a year.

The ERS, which released quarterly results at its board meeting yesterday, also voted to take Bank of Hawaii off its watch list after the bank's 15-month alliance with Nuuanu-based C.M. Bidwell & Associates resulted in a ninth-place ranking in its nationwide peer group since the portfolio's inception. The Bank of Hawaii large-cap core-style portfolio posted a 2.3 percent return last quarter to outpace the Standard & Poor's 500 index gain of 2.1 percent.

Another market manager for the ERS -- Bishop Street, a subsidiary of First Hawaiian Bank -- had its equity portfolio put on the ERS watch list yesterday due to poor performance. The portfolio already had been on the watch list for organizational changes. Separately, Bishop Street's fixed-income portfolio was kept on the watch list yesterday due to performance and organizational changes.

The state pension fund places market managers on the watch list to warn them they may be in danger of having the ERS withdraw its assets if their performance or organizational structure doesn't improve.

The ERS' international equity investments gained 4.1 percent last quarter to bring the six-month return to 14.8 percent. Emerging markets, which are part of those investments, gained 6.3 percent last quarter to boost the six-month return to 22 percent. The ERS' international equity returns might have been stronger, but the ERS had put some of its assets in index funds for part of that time while it sought new international fund managers.

In a reflection of the stock market's shift to midcap stocks from small-cap stocks, the ERS' midcap stock holdings gained 3.8 percent in the quarter to stretch their six-month return to 9.2 percent. Small-cap stocks were up 2.2 percent in the quarter and 8.8 percent for the first six months.

The ERS provides retirement, disability and survivor benefits for more than 100,000 people, including more than 63,000 active members.